CBN Governor, Emefiele Explains How Nigeria Frittered $62b Foreign Reserves
The governor of the Central Bank of Nigeria, Godwin Emefiele met with some media chiefs at the weekend to discuss issues bordering on the economy, recession and how the misapplication of the country’s foreign reserves. During the meeting, Emefiele spoke on the efforts being put in place to revamp the economy. Excerpts:
Nigeria is in a recession, the first in decades. Things are bad and the people are suffering. How did we get there?
I must apologise that this is happening to our people. But I must confess that what is happening today is as a result of a global crisis. Global crisis in the sense that we have seen commodity prices dropping, we’ve seen geo-political tension, all around the world.
But I think when you want to address the issue of how we got here, it is important for us to go back into history, to remind ourselves that there was a time in this country when this country survived only on revenues from agricultural produce.
At that time, I’m talking about the 50s and the 60s and indeed up to the early 90s, Nigeria was the largest producer and exporter of palm produce in the world. Unfortunately, we abandoned these sectors because we found oil. I wish what we did at that time was to hold on to our potential in the agricultural sector. If we had held on to our potential in the agricultural sector, in the same vein held on to the potential (oil) that we found, our story would have been different today.
Unfortunately, what happened was that because we found oil, we let our guards down in the agricultural sector. And I’ll give you an example, this for me is a case of a country that unfortunately didn’t plan properly. Norway, a country with a population of less than five million people, produces agricultural produce, particularly fish. It exports fish today. Norway also produces crude oil, to the extent that today, it has one of the highest investments in the Sovereign Wealth Funds (SWF). Norway, indeed, has $873 billion in its (SWF). Notwithstanding having such a huge amount, Norway also takes very seriously the output from fish production, to the extent that the country survives on the revenue that it generates from fish export.
What does the country do with revenue from crude? It invests it. And at every point, the country is about to use the funds from crude oil. It only uses it for infrastructure purposes. That is a country that has planned for its people. Soon after we introduced the foreign exchange (forex) restriction on the importation of fish, the country’s farmers started complaining to the extent that the Parliament in Norway has met twice to see to how to ameliorate the adverse impacts of not being able to export fish to Nigeria on its farmers. Indeed, the country has sent several trade delegations to Nigeria to encourage us to lift the restriction so that they can export fish to Nigeria and we in turn pay them our hard-earned dollars which we do not have at this time. What we should all realise is that, by allowing the import of goods that can be produced locally in Nigeria, we export wealth and jobs to those countries and import poverty in return.
But, unfortunately we didn’t plan this way for our people and that’s why we are where we are today. And I’ll give you a few examples again. InSeptember 2008, Nigeria’s foreign reserve stood at $62 billion. What did we do with $62 billion? At a time the crude oil price was about N120 per barrel. What did the country do?
What we could have done was to save the money. If we couldn’t save the money, invest it in infrastructure, invest it in industry that would grow productivity and the wealth of our people. But what did we do? The Central Bank of Nigeria (CBN) at thattime went about licensing class ‘A’, class ‘B’, class ‘C’ Bureaux de Change (BDCs).
To class ‘A’ BDCs, the CBN was allocating $1 million per week; to class ‘B’ BDCs, it was allocating $750, 000 per week and to class ‘C’ BDCs, it was allocating $500,000 per week to the extent that between 2005 when the apex bank started selling dollar cash and January 2016, when we stopped it, the CBN had sold dollar cash of up to $66 billion to BDCs. In 11 years, CBN allocated $66 billion, averaging $6 billion per year. If this didn’t happen, we would, comfortably, be having well over $90 billion in our reserve account today and we will not be struggling to pay our bills.
If we had thought of other ways to utilise our reserves in 2008 when it was as high as $62 billion, perhaps certainly, we would not be where we are.
How do you expect the recession to be over with prices going up and manufacturers lacking raw materials?
Let me say this, I must confess that I wasn’t optimistic that the Foreign Direct Investment (FDI) will come initially, but with what we have seen in three months, almost $1 billion had come. I feel that there will be more inflow into the system and more and more people will have foreign exchange to do their businesses. That will improve the industrial capacity. The rate may be high now, but there’s high possibility that with more availability of forex, the rate will come down. I am very optimistic that a lot of positive things will happen.
Now in terms of short run, I have talked about encouraging inflows to come in. I have talked about how the fiscal authority is trying to push in liquidity to stimulate consumption, demand consumption expenditure and of course, when consumer consumption is stimulated, demand for goods will go up and if these demand goes up, the industrial capacity, then you will see the activities. If we maintain a steady course in the way we are going, and if all those who have forex repartriate them, more and more people will have forex to do their business. That will improve industrial capacity. The rates may be high now, but there is the possibility that as we receive more and more foreign exchange, the rate will come down. I am really optimistic that this will happen.
What’s your view to calls on government to embark on assets stripping?
You will recall that as at April last year, I had an interview with Financial Times of London. That was even before the present government came on board. I had opined that there was need for the government to scale down or sell off some of its investments in oil and gas, particularly in the Nigerian National Petroleum Corporation (NNPC) and the Nigerian Liquefied Natural Gas (NLNG) as at that time when the price of oil was around $50-$55 per barrel. We actually commissioned some consultants that conducted the study and at the end of that study, we were told if we sell 10 per cent to 15 per cent of our holdings in the oil and gas sector, we could realise up to $40 billion. Unfortunately, the markets have become soft. Now, if we choose to do that now, we could still get $10-$15 billion or maybe $20 billion. If we have that kind of liquidity, it will be easy for us to really stimulate spending and also to turn the economy around. That proposal is still on the table because I have also heard that some of our colleagues in the Federal Executive Council (FEC) have talked about it, and a lot of people too. If we take that option, I am optimistic that we will be able to stimulate the economy and earn foreign currency that we can really use to jumpstart and stimulate the economy.
Don’t forget that even in the U.S., when the economic crisis started, the U.S. government stimulated the economy with about $900 billion and subsequently injected $85 billion monthly for an extended period of time.
In Japan and Europe with low rate of inflation, in fact they have negative interest rate. Anytime they want to stimulate the economy by liquidity, if you push the inflation it will not affect prices.
We are trying to fight inflation to remain at a point where it will not be too high and become injurious to our people.
Don’t you think the absence of Chief Executive Officers (CEOs) in some of the parastatals will render ineffective government’s desire to fasttrack spending even with a bill to shorten the procurement process in place?
Unfortunately, I don’t agree with you because we have cabinet members and most of these agencies are headed by ministers and we have people who are working in acting capacity. There are other people who are there as executive directors and I do know that once we are able to shorten the procurement process, the absence of CEOs will not hamper spending.
You are talking about more spending and the fiscal side is bent on generating more revenue from taxation. How do you align the monetary with the fiscal to attain a common purpose?
Let me assure you that both the monetary and fiscal are working together and that is why you could see a situation where today, even where we have revenue shortage or deficit, the monetary authority is trying to bridge the gap. We said that we can give you a bridge to go ahead and spend when you obtain the foreign loan or when your revenue improves, you can repay the bridge that we have created for you in order to stimulate spending. That is a practical case of collaboration between the monetary and fiscal authorities.
Now, when you talk about increases in taxes, there has been a lot of proposals presented to the Federal Government. For instance, that the Value AddedTax (VAT) should go up. And I must confess that taxes in Nigeria, particularly the VAT, is among the lowest in the world. In spite of that, the government has been very reluctant to increase the VAT rate because it really understands the suffering and the yearning of the people.
But what the government has admitted, which you and I also know, is that there are so many people side-tracking and avoiding payment of VAT taxes, thereby hampering the implementation of the VAT regime. However, the government is working to widen the scope horizontally, so as to capture more people into the tax net. That is what I’m aware the government is doing.
You have explained how external shocks contributed to the recession in Nigeria but you have not addressed the issue of internal problems arising from the delay in putting in place the necessary structural adjustments which may have slowed down the economy right from the onset of this recession. For instance, marketers are talking about stopping the importation of fuel because of the impact of the fall in the value of the naira. Also there’s need for a rethink about the Treasury Single Account (TSA) that’s currently being sterilised in the CBN, of which some of the money could be used to spend our way out of recession. What’s your take?
I’ll take the TSA issue first. As far as I’m concerned, TSA is a programme that several governments in the past have tried to implement but unfortunately they did not have the will to do so. And I will give you an example. Is it fair that the government allows Ministries, Departments and Agencies (MDAs) to release its money to the banks and those banks don’t pay any interests to the government. At best, they pay one or two per cent, but at the same time when government wants to borrow by selling Treasury Bills, government goes back to these banks and these banks use the liquidity that the government gave through the MDAs and pass back to the Federal Government at 12, 13 or 14 per cent. This is a colossal waste of resources on the part of government. So, the people’s belief that because TSA is sitting in the CBN, therefore it’s part of what is causing the crunch. It is not true. When the government was going to withdraw the TSA, the Monetary Policy Committee (MPC) also looked at its own ways of injecting some funds into the system through the Cash Reserve Ratio (CRR) that was held, so that the money cycles back into the CBN and the government gets its money back. So, I do not agree that the TSA is a major issue here.
On the necessary structural adjustments, again, it is unfair to blame this government for not taking decision on structural adjustments and I will tell you this. Normally, when you have an adjustment in currency worldwide, those adjustments must be followed with structural reforms. Just as the President talked about in 1984. After that we went into Structural Adjustment Progremme (SAP). The SAP was meant to build structural adjustments or structural reforms. But when the crude price started to improve, everybody abandoned the structural reforms and that was why we could not effectively diversify the economy.
There was a government that came at that time and said, let’s pursue green revolution, and another government said everybody should go to the farm. But immediately crude prices started going up, everybody abandoned green revolution, everybody abandoned going back to the farm. And that’s why we are saying now that, yes, an adjustment is going on, adjustment in the currency has happened, there is a need for us to follow through with some structural reforms that would lead to diversifying the economy.
For instance, we have somebody who has decided to invest in a refinery with a capacity for 650,000 barrels per day. The same person has decided to invest in petrochemical and fertilizer. These three projects alone will cost nothing less than $11 billion. And these three products take nothing less than 35 per cent of our import bill. What happens by the end of 2017 to 2018 when we stop the importation of these products? You will see that we are able to conserve our reserves because the demand for foreign exchange for these items will reduce.
So, I’m saying that the structural adjustment will work. After what the government is pushing, that we must diversify the economy and that items that we are importing and which can be produced locally, we must see to it that they are produced here. That is why government has continued to support the restriction on forex for items, like rice fish and tomatoes.
You also talked about petroleum products pricing. Petroleum pricing is something the citizens have taken passionately. I think Nigerians love and trust Mr President that is why despite the increase in the prices, Nigerians accepted it. Why, because they found out that because of shortage of forex, marketers stopped importing the product. The NNPC was saddled entirely with the responsibility of importing petroleum products. Of course, it became so bad and embarrassing to the citizenry to the point that elsewhere, people were buying fuel at N86, while others were buying it for as high as N150 a liter and at N200 in different parts of the country. The people began to agitate that if I could buy at N200 or N150, well, just make it available. That informed the decision to increase the pump price from N86 to N145 per liter so that the people can move around to conduct their businesses. Hence, at that rate, it will be possible for them to source their forex at a price not less than N280 to the dollar.
The TSA issue appears to be a case in which you have got everybody in through one door and no none is coming out. How will the government avert this looming petrol crisis?
I am telling you that with the arrangement put in place; and I mean the agreement between the CBN and the NNPC to make the dollar available to the importers of petroleum products, all the International Oil Companies (IOCs) selling dollars have been directed to channel the dollars to fuel marketers. This is a mechanism created by CBN and the NNPC. At the time this programme started, we’re told that they could procure forex at N280 to the dollar and the price should not be more than N145 per litre. In working out the effective price of N145, the template provide for nothing less than N30 per litre margin for the marketer. You can quote me on this. That template is available. By making N30 per litre available to the marketer, what this does is that even if the marketer does not find the product at N280 to the dollar and he finds it at a price close to N300 to the dollar or N305 or even N310, that marketer will still make a profit even though it could be a reduced margin.
That is the template that is currently in place and I am optimistic that it will work. Based on this arrangement between the CBN and the NNPC, we will see to it that IOCs are not compelled to sell at a fixed rate, we will see to it that they sell at the average of the interbank rate of the previous day which means where the marginal rate is N305, and some are selling at N310 or N315, the rate will then be between N305 and N310. If the marketer procures forex at an average of N305 and N310, they will still make a profit and sell that petroleum product at not more than N145 per litre.
I want to know what you are looking at in the short-term and on the bridge funding arrangement to stimulate the economy. Again you once talked about the need to sell some assets in the oil industry and just yesterday (September 16), Alhaji Aliko Dangote also spoke to CNBC about selling some of the assets the government is holding on to in order to raise money. But the impression one is getting is that government is not looking at that advice. How true is this impression?
What I am saying is this; the government can stimulate demand by spending to fund it’s budget and we, as the monetary authority, have told the fiscal side that if the need arises to the point where they need a bridge fund, we will provide that. We are not there yet and I would imagine that should not bother you at this time. The government is working to stimulate the economy by spending. That’s why as you heard the minister of Finance talking about the fact that N420 billion and another N370 billion to N400 billion is being made available this week. This is certainly an attempt to stimulate the economy through spending. The most important thing now is that we need to stimulate the economy and the fiscal authority is alive to its responsibilities in achieving this objective.
On the sale of assets in oil industry, you will recall that on April 1, last year, 2015, I granted an interview to Financial Times of London where I suggested that in order to raise money to fund its capital expenditure, the government needed to sell between 10 per cent to 15 per cent of its oil and gas assets. At that time, the oil price was about N50/N55 per barrel and our consultants did the numbers and told us that we could raise between $25 to $35 billion. I would imagine that that option is still on the table because more people even in the cabinet have made the same suggestion and if it happens, that will be fine, including the option to buy back the assets at some premium if it contemplates buying back when the crude prices move up and the assets value also move up. You know that in government, there are those against and those in favour. The argument in favour of selling the assets has gained a lot of credence recently.